Creo Medical — Entering phase of accelerating growth inflection

Creo Medical (AIM: CREO)

Last close As at 28/03/2024

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Research: Healthcare

Creo Medical — Entering phase of accelerating growth inflection

FY22 was a key inflection period for Creo with significant traction in the adoption of Speedboat Inject (its flagship electrosurgical device) and its proprietary CROMA technology platform, reflected in major robotic deals with Intuitive Surgical and CMR Surgical. Total revenue growth (8% y-o-y to £27.2m) was in line with consensus (£27m) and was primarily driven by Creo’s core technology business. Operating losses rose to £30.8m, affected by increased personnel and R&D expenses, although management expects a sharp reduction from FY23 following cost-optimisation measures implemented in H222. We expect further expansion of the Speedboat Inject user base (with an emphasis on training enrolment) to be the strategic priority in FY23. With the recent fund-raise of £33.7m (gross) in Q123, we estimate the company is funded to operational profitability in H126. Incorporating the improved cash balance post the reporting period, our valuation increases to £528m (150p/share) from £493m.

Soo Romanoff

Written by

Soo Romanoff

Managing Director - Head of Content, Healthcare

creo05

Healthcare

Creo Medical

Entering phase of accelerating growth inflection

FY22 results

Healthcare equipment

and services

2 May 2023

Price

26p

Market cap

£92m

Pro forma net cash (£m) at 31 December 2022 (includes £32m fund-raise in Q123)

33.4

Shares in issue

350.9m

Free float

87.8%

Code

CREO

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(15.5)

28.5

(76.1)

Rel (local)

(17.7)

27.6

(76.6)

52-week high/low

102p

18p

Business description

Creo Medical is a UK-based healthcare company focusing on the development and commercialisation of minimally invasive electrosurgical devices. It has six products in the flagship CROMA platform, all of which have been CE marked and four of which have been cleared by the FDA. In 2020 Creo acquired Albyn Medical, which provides it with profitable products and a direct salesforce in Europe.

Next events

Q123 trading update

May 2023

Analysts

Soo Romanoff

+44 (0)20 3077 5700

Nidhi Singh

+44 (0)20 3077 5700

Jyoti Prakash, CFA

+44 (0)20 3077 5700

Creo Medical is a research client of Edison Investment Research Limited

FY22 was a key inflection period for Creo with significant traction in the adoption of Speedboat Inject (its flagship electrosurgical device) and its proprietary CROMA technology platform, reflected in major robotic deals with Intuitive Surgical and CMR Surgical. Total revenue growth (8% y-o-y to £27.2m) was in line with consensus (£27m) and was primarily driven by Creo’s core technology business. Operating losses rose to £30.8m, affected by increased personnel and R&D expenses, although management expects a sharp reduction from FY23 following cost-optimisation measures implemented in H222. We expect further expansion of the Speedboat Inject user base (with an emphasis on training enrolment) to be the strategic priority in FY23. With the recent fund-raise of £33.7m (gross) in Q123, we estimate the company is funded to operational profitability in H126. Incorporating the improved cash balance post the reporting period, our valuation increases to £528m (150p/share) from £493m.

Year

end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/21

25.2

(29.7)

(14.6)

0.0

N/A

N/A

12/22

27.2

(31.0)

(14.9)

0.0

N/A

N/A

12/23e

32.8

(24.3)

(6.3)

0.0

N/A

N/A

12/24e

40.8

(14.8)

(3.6)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Focus on broadening the product portfolio in FY23

With Speedboat Inject continuing to gain traction, Creo is planning to tap into more opportunities by expanding its product portfolio. In November 2022, the company launched Speedboat Slim, a slimmer version of Speedboat Inject, compatible with the majority of currently used endoscopes. In addition, the company submitted a 510(k) application with the US FDA for its new device, Speedboat Flush (the slimmest version of Speedboat), in February 2023. Notably, Creo commenced the first in-human and post-market study of its MicroBlate Flex device in April 2023.

Fund-raise to take Creo to operational profitability

Despite the skittish capital market situation, Creo was able to raise £33.7m (gross) in Q123 in two oversubscribed rounds of funding, signalling shareholder confidence in the company. In the first round (February 2023), the company raised £28.5m in gross proceeds (£26.8m net) through an accelerated book building process by issuing 142.5m new shares at 20p/share. Alongside this, Creo announced an open offer of £5.2m to all eligible shareholders, which was fully subscribed in March 2023. The equity raise, though dilutive in nature, provides operating capital to fund the company’s growth and commercialisation plans to profitability.

Valuation: £528m or 150p per share

Our valuation increases to £528m from £493m, mainly reflecting the increased cash balance following the Q123 fund-raise, but given the increased number of shares outstanding, our per share valuation is now 150p (vs 272p). We believe funds on hand should be sufficient to take Creo to net profitability in H126.

FY23 to focus on driving CROMA technology forward

Speedboat gaining market traction

FY22 was an eventful period for Creo Medical, marked by growing adoption of the company’s core CROMA technology platform and its flagship Speedboat Inject device. With a year-on-year three times increase in revenue from Speedboat Inject and CROMA (£0.9m in FY22), a four times increase in user base and a robust training pipeline of clinicians (487 trainees), Creo enters FY23 with a strong foundation to scale operations and expand the scope of its CROMA technology. Reflecting this continued momentum, management has indicated that total procedures (using Speedboat Inject) in Q123 were 50% higher than the FY22 quarterly average and Q422 actual cases.

Creo reported in FY22 the total number of Speedboat users significantly increased to 80 (91 by end-March 2023) compared to 20 users in FY21. More than 1,500 procedures performed to date and 487 potential users under its clinical training programme (Pioneer) further indicate the favourable user response for the device and the near-term sales potential. Increased investment in training and mentoring capability has resulted in an enhanced user base, and Creo plans to continue its emphasis on the Pioneer training programme to sustain the momentum. The company nearly doubled the number of training centres in FY22, resulting in similar growth in the number of physicians on its training programme (450 in FY22 vs 230 in FY21). Creo has a backlog of over 90 trainees, which the company expects to convert into regular users in FY23. Additionally, Creo intends to collaborate with the American Society for Gastrointestinal Endoscopy and other key academic centres such as UCI Health, Mayo, Penn and Baylor to further extend the scope and reach of its training courses in the United States.

Exhibit 1: Creo’s user forecast data by usage category

Exhibit 2: Creo’s user and mentoring capacity

Source: Creo Medical presentation, March 2023

Source: Creo Medical presentation, March 2023

Exhibit 1: Creo’s user forecast data by usage category

Source: Creo Medical presentation, March 2023

Exhibit 2: Creo’s user and mentoring capacity

Source: Creo Medical presentation, March 2023

Building a base for other CROMA-powered devices

Along with enhancing the Speedboat user base, Creo has been focusing on developing a broader product portfolio to increase the operational scope of its offerings. As part of its portfolio expansion strategy, Creo launched a slimer version of Speedboat Inject, Speedboat Slim, in November 2022, which management says is compatible with the majority of currently used endoscopes globally, along with paediatric endoscopes, for both lower and upper gastrointestinal (GI) procedures. With initial orders already received, the company expects Speedboat Slim to contribute to FY23 revenue.

Creo submitted a 510(k) FDA application in February 2023 for Speedboat Flush, the slimmest version of Speedboat, compatible with endoscopes with a 2.8mm working channel, targeting GI lesions (including bowel and upper GI cancer) and swallowing disorders. We note that standard upper endoscopes have an external diameter in the range of 8.0–9.8mm with a 2.4–2.8mm channel. In addition to the US regulatory process, management plans for Medical Device Regulation submission for CE marking in April 2023. Creo expects that the device, after successful regulatory clearance, will be ready for clinical use in H223.

In addition, the company announced a multicentre observational study in April 2023 to assess the safety and efficacy of MicroBlate Flex, a soft tissue microwave ablation device for both liver and pancreas. We note that the device has been CE marked in Europe and received FDA clearance in January 2021. This first in-human clinical study for the device is a post-market, prospective, single-arm, multicentre, non-randomised, observational study, which plans to enrol up to 32 patients in six sites in Europe and possibly one site in the United States. During the trial, MicroBlate Flex will be used in bronchoscopic microwave ablation of peripheral lung nodules. It also requires a post-procedure assessment and six follow-up visits at seven days, 31–45 days, three months, six months, nine months and 12 months. Recruitment for the study has commenced, with the first treatment expected in Q223. The primary completion of the study (which we believe to be the date when the last patient is recruited) is anticipated in March 2024, while the full study completion is expected in March 2025. We believe these observational studies are a step forward in developing and increasing the market potential for Creo’s devices. The user data, if positive, might lead to enhanced adoption of the device. We note that this post-market study is one of several planned by Creo (in collaboration with its Kamaptive technology partners) for its ablation devices in 2023.

Incremental growth opportunities in Consumables

Post its acquisition in June 2020, Albyn Medical has been an integral part of Creo’s suite of products, generating stable, and the majority of, revenue (91.6% in FY22) for the company. Creo’s recent announcement relating to the final earnout payment and acquisition of the remaining 5% stake in Albyn Medical (for €1.2m and an additional €1m as a second earnout tranche) is a reflection of the successful integration of and contribution from the mature business. As a reminder, Albyn Medical is a seller of own and third-party consumables and systems (primarily GI endoscopy related) with a core focus on the UK and European markets, and complements Creo’s core portfolio of minimally invasive electrosurgical devices (using proprietary CROMA technology). Creo acquired a 90% stake in Albyn in July 2020 for an equity value of €24.8m and €2.7m in performance-related payments over two years. Creo then acquired another 5% stake in March 2022 (for €1.2m and an additional €1.7m as the first earnout tranche) followed by the balance in April 2023.

In order to leverage the extensive range of Albyn’s endotherapy products (initially marketed only in Europe), Creo launched many of these products in the United States during FY22 as part of bundled products with its core technology. We believe this strategy will not only expand the geographic scope for these products, but will potentially create higher revenue per procedure. Management states that consumables sales in Q123 were up 10% compared to the FY22 quarterly average. As a step forward, Creo plans to use a similar strategy for the consumables launch in Asia-Pacific in FY23.

Financials

Creo reported FY22 revenue of £27.2m, an 8.0% y-o-y increase, with growth primarily driven by enhanced sales uptake of its flagship Speedboat Inject (3x growth to £0.9m in FY22 vs FY21) and initial licensing revenue of £1.4m from its existing Kamaptive technology (non-exclusive) agreements. The Consumables segment recorded largely similar revenue at £24.9m in FY22 (vs £24.8m in FY21), however it remains the primary revenue contributor for Creo, accounting for 91.6% of total revenue. During the year, the total number of Speedboat users quadrupled to over 80 in FY22 (91 in Q123) from 20 in FY21, indicating growing market acceptance of the product and a favourable conversion rate from its training programme. Though we have limited visibility of licensing revenue, we expect Creo’s core technology products (3.2% of total revenue or £0.9m in FY22) to be the key growth drivers in the medium to long term. Gross margin for the year increased from 46.0% (FY21) to 48.3%, mainly reflecting improved margins from Consumables sales and no-cost licensing deals.

The total operating loss in FY22 stood at £30.8m, higher than £29.9m in FY21, mainly attributed to increased investment in operational capacity and higher personnel expenses associated with recruitment of senior employees to support the operational growth and completion of R&D projects. Consequently, total operating expenses during the year grew 5.7% (y-o-y) to £43.9m. While sales and marketing expenses recorded a minor increase to £3.8m (FY21: £3.2m), a 4.8% growth in R&D expenses (to £13.5m) was mainly related to completion of key R&D projects in H122. Following this, operating expenses witnessed a decline of 18.7% in H222. As most of the company’s products are now developed, and following the restructuring of its R&D teams, management expects this trend of decreasing operating expenses (as a percentage of sales) to continue, resulting in a yearonyear decline in overall operating expenses in FY23. In Q123, the company recorded 10% lower operating expenses compared to the FY22 quarterly average. We note that the majority of Creo’s ongoing R&D programmes are funded by its licensing partners, such as Intuitive, as part of the licensing agreements. In FY22, Creo was reimbursed £4.0m, 31.4% of FY21 R&D expenditure, under the tax credit scheme. The net loss stood at £26.9m in FY22, higher than £24.6m in FY21.

Although our long-term assumptions remain unchanged for Creo, we have made minor adjustments to our FY23 estimates and have introduced FY24 forecasts. We have revised FY23 revenue estimates to £32.8m (£31.0m previously) based on Speedboat Inject user data in FY22. While we assume moderate growth of 3.4% in Consumables sales in FY23, we estimate core technology to ramp up to account for about 12% of total group revenue (vs 3% in FY22). Additionally, we anticipate income from licensing agreements in FY23. However, given limited information and visibility of the CMR deal terms, we project £3.0m of milestone income from the Intuitive agreement in FY23. We have also increased our FY23 estimate for operating expenses to £41.8m (£38.4m previously) given the trends shown in FY22, but we anticipate a year-on-year reduction (vs FY22) based on company guidance and reduced R&D spending requirements. These changes translate into an operating loss of £24.0m (£21.6m previously). In FY24, we estimate revenue at £40.8m as we expect an accelerated ramp up in core technology products, along with incremental revenues from robotics deals from the Intuitive licensing agreement. We also anticipate the Consumables segment to benefit from bundled sales in the United States and Asia-Pacific in FY24. Reflecting the impact of higher revenue and a further anticipated reduction in operating expenses (£39.1m), our operating loss estimate stands at £14.6m in FY24.

Exhibit 3: FY23–25 revenue forecasts by business area

Source: Edison Investment Research

Valuation: £528m or 150p per share

Our valuation for Creo Medical increases to £528m from £493m, mainly due to the higher cash balance resulting from the equity fund-raise of c £32.0m (£26.8m in net proceeds plus £5.2m in gross proceeds) in Q123. Given the increased number of shares outstanding, the per share valuation is now 150p per basic share (vs 272p previously).

In February 2023, Creo raised £28.5m in gross proceeds (£26.8m net) through institutional investors by placing 142.5m new ordinary shares at 20p/share (a 28% discount to the 15 February closing price). The fund-raise was oversubscribed against the minimum target of £25m, indicating strong shareholder support. In addition, the company announced an open offer to existing eligible shareholders to raise another £5.2m in funds via the conditional issue of c 26m ordinary shares, which was fully subscribed in March 2023.

Creo ended FY22 with a cash balance of £13.1m and £11.7m in debt. After incorporating the £26.8m (net proceeds) fund-raise via an accelerated book building process and £5.2m (gross proceeds) from an open offer, we estimate a pro forma net cash position of £33.4m. Based on our projected cash burn rates, we expect the current cash balance should be sufficient to take Creo to operational profitability in H126 (FY25 according to management estimates). Additionally, we expect milestone payments from the CMR deal and potential revenue from several heads of terms agreements could further strengthen the cash flow. These have been excluded from our current estimates due to limited visibility.

Exhibit 4: Creo’s valuation

Product

Main indication

Status

Probability of successful commercialisation

2027 sales
(£m)

rNPV
(£m)

Core Technology (Croma Platform)

GI, soft tissues and pulmonology

Market

100%

48

385.5

Consumables (Albyn Medical)

Urology, gynaecology and GI

Market

100%

32

75.5

Partnerships (Intuitive)

50%

33.7

Total

 

 

 

 

494.6

Estimated net cash (31 December 2022) including January fund-raise

33.4

Total firm value

528.0

Total basic shares (m)

350.9

Value per basic share (£)

1.50

Options (m)

0.0

Total number of shares (m)

350.9

Diluted value per share (£)

1.50

Source: Edison Investment Research

Exhibit 5: Financial summary

£'000s

2021

2022

2023e

2024e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

25,161

27,169

32,817

40,754

Cost of Sales

(13,576)

(14,047)

(15,015)

(16,321)

Gross Profit

11,585

13,122

17,802

24,433

Research & Development Expenses

(12,869)

(13,492)

(11,468)

(9,175)

Sales, General & Administrative expenses

(25,490)

(27,325)

(27,052)

(26,781)

EBITDA

 

 

(19,982)

(20,805)

(20,667)

(11,472)

Underlying EBITDA (Adjusted for R&D tax credit)

 

 

(14,238)

(16,764)

(17,027)

(9,249)

Operating profit (before amort. and excepts.)

 

 

(29,284)

(30,756)

(23,954)

(14,642)

Intangible Amortisation

0

0

0

0

Other

52

51

51

51

Exceptionals

(623)

0

0

0

Operating Profit

(29,907)

(30,756)

(23,954)

(14,642)

Net Interest

(432)

(221)

(313)

(179)

Other

0

0

0

0

Profit Before Tax (norm)

 

 

(29,716)

(30,977)

(24,267)

(14,820)

Profit Before Tax (reported)

 

 

(30,339)

(30,977)

(24,267)

(14,820)

Tax

5,744

4,041

3,640

2,223

Deferred tax

0

0

0

0

Profit After Tax (norm)

(23,972)

(26,936)

(20,627)

(12,597)

Profit After Tax (reported)

(24,595)

(26,936)

(20,627)

(12,597)

Average Number of Shares Outstanding (m)

164.4

181.3

329.7

350.9

EPS - normalised (p)

 

 

(14.58)

(14.85)

(6.26)

(3.59)

EPS - Reported (£)

 

 

(0.15)

(0.15)

(0.06)

(0.04)

Dividend per share (£)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

39,442

41,650

41,002

39,962

Intangible Assets

27,255

27,643

26,752

25,896

Tangible Assets

8,603

10,184

10,427

10,242

Other

3,584

3,823

3,823

3,823

Current Assets

 

 

61,167

33,687

43,754

33,520

Stocks

8,504

9,325

9,968

10,835

Debtors

4,830

6,765

8,171

10,148

Cash

43,534

13,097

17,475

2,174

Other

4,299

4,500

8,140

10,363

Current Liabilities

 

 

19,737

17,483

15,100

15,937

Creditors

9,921

9,000

9,620

10,457

Short term borrowings

5,381

5,616

2,613

2,613

Other short-term liabilities

4,435

2,867

2,867

2,867

Long Term Liabilities

 

 

7,554

8,451

7,425

6,399

Long term borrowings

5,175

6,067

5,041

4,015

Other long term liabilities

2,379

2,384

2,384

2,384

Net Assets

 

 

73,318

49,403

62,230

51,145

CASH FLOW

Operating Cash Flow

 

 

(23,199)

(24,955)

(17,002)

(9,743)

Net Interest

(463)

(287)

(326)

(196)

Tax

(2,349)

258

(3,640)

(2,223)

Capex

(6,122)

(3,274)

(2,638)

(2,130)

Acquisitions/disposals

(1,752)

(2,753)

0

0

Financing

34,208

0

32,000

0

Dividends

0

0

0

0

Other

0

0

0

0

Net Cash Flow

323

(31,011)

8,394

(14,292)

Opening net debt/(cash)

 

 

(32,737)

(32,978)

(1,414)

(9,821)

HP finance leases initiated

0

0

0

0

Exchange rate movements

(303)

(56)

0

0

Other

221

(497)

13

17

Closing net debt/(cash)

 

 

(32,978)

(1,414)

(9,821)

4,454

Source: company reports, Edison Investment Research

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General disclaimer and copyright

This report has been commissioned by Creo Medical and prepared and issued by Edison, in consideration of a fee payable by Creo Medical. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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United Kingdom

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As flagged in its February update, the Speciality Agriculture division of Carr’s Group experienced a weaker trading environment from November onwards, while trading in the Engineering division was initially slower than anticipated. This resulted in a 23% drop in adjusted operating profit year-on-year in H123 to £5.8m. Management expects trading conditions for the Speciality Agriculture division to improve later this calendar year, while a strong Engineering order book supports good divisional performance in H223 and FY24. We downgrade our FY23 and FY24 adjusted PBT estimates by 5% for both years.

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